IT as a Company Value Multiplier

Company value is said to be the determination of the economic value of the entire company or a specific branch. Company value needs to be determined due to various reasons such as during taxation cases, selling or acquisition, partnership claims, or divorce cases. Value multipliers are used to display the actual earnings of the company.

The basics of company value

Company value is estimated based on the objective aspects of the business; it may take into account the management of the company apart from the capita. Besides considering the current dealings, the future prospects of the company returns that the company can yield in the future market are also a part of the discussion.

Some common approaches for estimating the company value include a review of cash flow, financial records, and also comparisons with other related companies. Of course, taxation is also a significant part of this in order to get a reasonable market price.

How to value a company?

Companies are valued based on several methods, an amalgamation of science and art; some prefer few methods over others, but all of them are equally great. A few methods of calculating company value are listed below-

Market capitalization is by far the simplest method of estimating the value of a company. You can obtain it by multiplying the share price of the company by the total number of shares. Take the example of Microsoft; as of January 2018, the price of shares was $86.35, and the number of outstanding shares was 7.715 billion, which made the company value of Microsoft $666.19 billion.
A better picture of the actual earnings of the company may be obtained with the help of the earnings multiplier method because the sales and profit paint a clear picture of the financial condition of the company. In this method, the future profit is invested in the present interest rate over the same amount of time by adjusting the P/E ratio.
Book value is another answer to how are companies valued. It is simply calculated by eliminating the total liabilities of a company from its total value of assets.
Discounted cash flow method is a little similar to the earnings multiplier method, where the future cash flow of the company determines the current company value. However, DCF also takes into account the inflation of the company, which distinguishes it from the earnings multiplier.

What is a company value multiplier?

Value multipliers are an essential part of determining the company value. They are used in various ways in order to get the actual value of the company. A multiplier of a small sized business falls in the range of 1 to 3; for larger companies, it lies around 4 or higher. The value you get will be multiplied by the earnings of the company before spending on taxes or any other interests.

Various factors influence in increasing or decreasing your company value multiplier. Some of them are given below-

If your business is less dependent on the number of products or customers, then it will become more consistent, and hence the multiplier will increase.
Competition plays a massive role in multiplier; the less competition you have in the industry, the more is your multiplier due to increased sales.
Your multiplier will increase if you have a patented product or one which cannot be copied easily. Conversely, if your product gets copied easily by others, it will increase the competition and decrease your multiplier.
If your company is undergoing any government action or litigation, it will make a wrong impression and will decrease your multiplier.
After purchasing a product or service, if the buyer needs to make additional investments in your company, it will decrease the number of buyers, and hence your multiplier will also decrease.

Increase your company value

The company value may be increased by using a couple of tools if you are looking forward to selling your company. First, you should focus on increasing sales; with a good cash flow, your company value will increase tremendously.

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Only increasing sales will not take you any further; you must lower your expenses so that your company value can rise. In addition, the operational efficiency of your company must be increased, and more productive hours must be invested.

Decide on the investment areas and focus on that. You should cut the unnecessary costs but never curtail spending altogether. You have to keep improving your resources so that your company moves towards growth and betterment.

Try to develop products that are not available in the market but the ones needed by people so that your purchases increase. Dedicate your human resources and create a team for inventing new strategies to move your company further.

Secure all the loose ends, keep working on your strong points but do not abandon your weakness, instead embrace the weaknesses of your company and spend time, dedicate meetings in order to make improvements. Company valuation is a challenging topic that catches people off guard. Often people are known to miscalculate their company value because of hasty decision making or under stress. Before you move on to how to valuate your company, you should keep the above mentioned points in mind and never settle for anything less than your company deserves. Use the best method possible for getting the correct company value.

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